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M&A Financing Drives Leveraged Finance Market Beat | White & Case srl


  • European M&A leveraged loan issuance (excluding buyouts) increased 19% year-on-year to €54.9 billion in 2021
  • High yield bond issuance for transactions jumped to €17.8 billion in 2021, a 53% gain from 2020
  • The value of European M&A deals stood at US$1.3 trillion in 2021, just below the record set in 2007 (US$1.4 billion)

A rebound in European corporate deals led to a double-digit acceleration in leveraged funding for M&As (excluding buyouts), with a strong pipeline paving the way for an active 2022.

In the summer of 2021, many companies are putting their homes on the market, so to speak, sometimes having hesitated for years. COVID-19 had already put many M&A plans on hold in 2020. So when the companies that had delayed the sale realized that their competitors were more optimistic and were attracting good prices, they jumped in with both feet.

Mega-deals played an important role in this flurry of activity, such as the €24.8 billion merger between German real estate groups Vonovia and Deutsche Wohnen. Big inbound plays for European assets by US buyers were also on the menu, including Parker Hannifin’s €8.4 billion privatization of British aerospace and defense group Meggitt, whetting investors’ appetite for high-priced mergers and acquisitions of European companies.

At the same time, lenders were in a better position to assess the resilience of businesses after 18 months of the pandemic and were looking for accommodation. They were more comfortable identifying good credit and putting their money to work.

There was also an opportunistic element at play in this increase in transactions. Companies that had performed unexpectedly well during the pandemic or industries inundated with new business became attractive targets. Logistics companies and warehousing companies found themselves on the front lines as more people shopped online and delivery became an essential service. Pharmaceutical companies, from vaccines to testing operations, were suddenly in the spotlight.

These factors – a backlog of deals coupled with pent-up credit supply, intriguing targets across a range of sectors, a better sense of the impact of the ongoing pandemic on these businesses, and good prices achieved – meant the situation was ripe for an increase in transactions.

According to data from Mergermarket, the value of M&A deals in Western Europe at the end of the third quarter of 2021 was already higher than the annual total in any year since the global financial crisis. By the end of 2021, it had reached US$1.3 trillion, far surpassing the US$768.3 billion in deals closed in 2020 and within reach of the all-time high of US$1.4 billion recorded in the market peak in 2007.

View full picture: Leveraged loan issuances (excluding buybacks) in Europe (quarterly) (PDF)

Use of proceeds from European leveraged loans (2021)

View full image: Use of proceeds from European leveraged loans (2021) (PDF)

A backlog of deals coupled with pent-up credit supply, intriguing targets across a range of sectors, a better sense of the impact of the ongoing pandemic on these businesses, and good prices being achieved – meant the situation was ripe for a increase in transactions

Rise in M&A boosts debt pipelines

This spike in activity spurred year-on-year growth in leveraged loan and high-yield bond issuance for mergers and acquisitions as companies took advantage of a range of options to finance the wave of strategic activities.

In the Western and Southern European leveraged loan markets, M&A loan issuance (excluding buyouts) increased by 19% year-on-year, reaching €54.9 billion in 2021. And much of this activity took place towards the end of the year: July, August and September 2021 were three of the four most important months for the issuance of M&A loans without redemption.

High-yield bond funding for corporate M&As (excluding buyouts), meanwhile, followed a similar upward trajectory in the region, reaching €17.8 billion for the year, up 53 % compared to 2020.

Many sellers entering the markets at the time still did so cautiously, hoping to avoid entering a crowded market with a limited number of increasingly selective investors. A company considering a massive deal didn’t want to miss out on potential investors. Timing was and is everything.

These are valid concerns and shareholders have been patient so far, but companies cannot sit on piles of cash indefinitely. Along with dividends and share buybacks, M&As will remain a key tool to deploy excess liquidity

Second half surge

Issuance related to M&A activity picked up where the high volume of refinancing activity left off, keeping the market buoyant through the end of the year. Borrowers entered the market in early 2021 to preemptively refinance existing credits at the low prices available in the market.

However, with loan and bond prices increasing over the year, the appetite for refinancing has diminished. The fact that many borrowers had already done their business earlier in the year also contributed to this slowdown in demand.

M&A activity was an inevitable next step for companies looking to divest, streamline their portfolios and focus on their core business. This benefited M&A issuers who were able to gain traction among syndicated banks and investors who had the ability to consider new funding opportunities.

Spain’s fourth-largest telecom operator MÁSMÓVIL, for example, raised more than €2bn in the high-yield bond markets to fund the acquisition of Basque rival Euskaltel, while pan-European healthcare group Cerba signed a €500 million package of covered and uncovered bonds. to finance the purchase of the Lifebrain clinical trials laboratory in October. French auto components supplier Faurecia, meanwhile, issued a five-year, €1 billion sustainability bond to fund its €6.7 billion purchase of German counterpart Hella.

Use of European High Yield Bond Proceeds (2021)

View full image: Use of European High Yield Bond Proceeds (2021) (PDF)

Business cash stacks

While companies have ramped up their M&A activity in 2021, strategic buyers remain somewhat cautious – many have yet to venture into the market. According to S&P Global, cash and other liquid instruments held by businesses worldwide hit a record US$6.84 trillion in 2021, 45% above the five-year pre-pandemic average.1

Concerns over rising numbers of COVID-19 cases in the US and Europe due to the Omicron variant have seen companies cling to cash reserves, protecting themselves in the event of a new round of limitations.

At the same time, any rise in interest rates will be closely scrutinized by buyers and lenders as it could have a significant impact on deal activity. If inflation continues to put pressure on margins and rates rise throughout the year, this burst of M&A activity could be muted by the end of 2022.

These are valid concerns and shareholders have been patient so far, but companies cannot sit on piles of cash indefinitely. In addition to dividends and share buybacks, mergers and acquisitions will remain a key tool for deploying excess liquidity.

After a burst of activity in 2021, expect M&A markets to remain active for at least the first half of the year, providing lenders with a strong pipeline of opportunities through 2022.

1 “Companies hoard record cash amid Delta fears”. Anna Hirtenstein. August 16, 2021. The Wall Street Journal.

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